Why the Time is Now for McKesson to Enter the Venture Market

By Tom Rodgers, SVP and Managing Director, McKesson Ventures

After we announced the launch of McKesson Ventures in December, I had the opportunity to speak with a number of people outside of our new venture capital fund – including several health care and business journalists – about why we’re doing what we’re doing.

Many seemed curious – if not slightly skeptical – about why we’re entering the seemingly crowded market of health care venture capital that is getting more crowded by the day. Several also questioned whether a company that’s perceived to be big and slow-moving can play well with others on a health care field with filled with nimble rookies.

Let me offer a few reasons why I think the timing is great for a well-established, veteran company like McKesson to join this ecosystem.

It’s Time to Thin the Herd.

There is no doubt that an unprecedented amount of venture capital has been pouring into health care, particularly in the area of digital health. Mercom Capital Group, for example, recently reported that the amount of venture capital funding in health care information technology more than doubled to $4.7 billion last year from $2.2 billion in 2013. Its great news for a industry that has long suffered from inertia and an incentive structure that optimized for consumption of high-cost services and treatments rather than for value and improving patient experience and provider accountability.

These investors are drawn in by a number of compelling new dynamics. Among those are the HITECH Act, the ACA, the availability of new wireless and mobile technologies, the health care needs of an aging population, energetic evangelists like Rock Health, rising health care costs and the sobering realization that the system is broken and we have no choice but to change.

Although the money invested so far has funded critical foundation-laying work, for the most part we have yet to see the new ballparks and stadiums rise from those foundations. Most funding has sponsored initial product iteration, business model exploration and proof-point gathering. We’re now at an awkward but exciting stage where some “culling” is going to happen. That’s the reality, and the roster cuts are probably going to increase dramatically as these companies go out for large Series B and C rounds of financing. Many will be left in the dugout if they don’t have differentiated value propositions and paying customers to give references.

We’re going to see some maturing take place in this space. The leaders that emerge will be the ones who learn how to navigate the often brutal health care enterprise sales cycles or those that acquire the much-anticipated but rarely sighted “health care consumer.” For us and others like Cambia Health, now is the perfect time to enter the market and support some of those emerging leaders. We’re joining the game in the late early innings, if you will, with a well-rested and strong pitching arm.

Healthcare Expertise Is Needed.

Much of the money that’s been directed toward these early-stage companies has come from “outside” sources that understand technology and can recognize charismatic leaders going after large markets in dire need of disruption. It’s come from tech investors, life-science investors and passionate angels.

What has been in shorter supply and will be critical during these middle innings are investors that understand why the coefficient of friction is so high for driving innovation and behavior change in health care. I expect that participation and active investment from venture firms that really understand the health care industry and the health care market soon will be in greater demand.

Stakeholders like McKesson know the jobs to be done in health care. We can use that expertise and vantage point to shape the direction of the solutions that these emerging leaders are developing. We can smooth the infields and base paths that they’re trying to navigate.

Health care innovation is hard. A few, rare companies will achieve compelling liquidity without having to go deep into their bullpen, but most won’t be so lucky. The market needs more investors that have health care compasses, even if they may appear rusty and analog.

About the author

Tom Rodgers leads McKesson Ventures. He spent more than a decade in health care venture capital, most recently leading strategic investing efforts for Cambia Health, and before that with Advanced Technology Ventures. Before his venture capital career, Rodgers had significant operating experience in the health care industry. He held various strategy and commercial roles at leading technology companies such as McKesson, Genentech, FitLinxx and The Wilkerson Group.

Join the Conversation

Yaa Boadu1 years ago

This is an excellent initiative! The healthcare industry needs long time and experienced players like McKesson to complete the total Health IT transformation and achieve the 2020 vision. I was wondering if those who benefit from this venture fund, will they be obliged to invest in McKesson's IT products or have the option to procure from your competitors?

Tom Rodgers1 years ago

We will do everything possible to help our portfolio leverage synergies with McKesson's core businesses and other portfolio companies when they exist. This will not involve anything that constrains the commercial efforts and partnerships that a portfolio company needs to undertake in order to scale. Our goal rather is to help them scale as quickly and efficiently as they can and create maximum value for management and all shareholders.

Todd Sloan1 years ago

Tom, will McKesson's investments be mainly centered around technology?
Has consideration been made for investments in new product or even providers of healthcare?

Wayne White1 years ago

I worked in the private equity side of the international power generation industry for many years. There were many who said that the PE market in power was grossly overcrowded. However, a plethora of participants means little when there is too often a lack of genuine expertise in transaction origination and transaction discipline among those participants. Tom's blog hits the nail on the head as to why it makes sense for McKesson to participate in this market. McKesson's expertise, discipline and long term focus will serve it well in this market, and as the weaker and less disciplined players fall by the wayside, it will leave ample investment opportunities for McKesson.

Tom Rodgers1 years ago

Great question, Todd. Most McKesson Ventures investments will likely be in companies that are leveraging a technology component as part of their commercial offering. We do not draw lines between whether a target portfolio company is more adjacent to McKesson's distribution versus technology businesses, rather we focus on whether or not we feel they are well positioned to drive towards and be successful in a future market that places more emphasis on the cost, quality and efficiency of care delivery and on patient experience and navigability. We also must have confidence that the company has sustainable advantages that will allow them to be successful. Sometimes this is underlying technology, but more often it's a strong team and early track record. Unfortunately in health care great technology and pilot results are often trumped by lack of stake holder alignment and resistance to behavior change. We will probably shy away from frequently taking on clinical or technology development risk. The reason being that McKesson overall will gain minimal insight returns if these companies fail. We are open to investing in provider based models.

Tom Rodgers1 years ago

Thank you, Wayne. Clearly we are like minded. We are once again at a place in time in the overall private equity market when there is a lot of money chasing not enough great ideas and as a result we are seeing upticks in valuations and exit expectations across the board. However in our smaller but also crowded HC ecosystem we are starting to see signs that the people with the good ideas are recognizing that they need help from smarter money, meaning organizations who understand the nature of the hurdles that must be overcome if these companies are ever going to live up to the valuation and exit expectations.

darryl burton1 years ago

Tom, this article is spot on. M&A will be the fastest way to scale; and some systems will go bankrupt. With the NextGen ACO market, you will see ACOs willing to merge Medicaid with their Medicare and private customers. The bipartisan SGR will pass and this cost reimbursement will add new customers.
If King v. Burwell is ruled in favor of the government, the pressure will be great on the non-expansion states to take on Medicaid. However, states will have an opportunity to be creative with the cost sharing.
I also think that in order to differentiate, we will see more active advertising especially on tv which will happen all year vs. the typical open enrollment season. You are our customer, client or member and no longer a consumer; consumer and consumerism will reside in the macro discussion about healthcare.
Your article emphasis on healthcare, which covers the entirety of the disruption. It is not just the health insurance costs or access, nor treatment. This is an industry of 3T GDP with a lot transformation happening in software, robotics, pharmaceuticals et al.

darryl burton1 years ago

Tom, what about idea that hospitals which are already under financial pressure, convert to holding companies especially given that many sit on valuable real estate. Could they not bring provider organizations of all type within the holding company? The issue for insurers is that their public image is horrible, so that has to factor into the model somewhere?

Tom Rodgers1 years ago

Darryl - Thanks for reading the post. As you point out there are many ACA driven tailwinds that are continuing to gain momentum but my fear is that it may take some time before health systems are adept at managing populations and individuals consistently taking preventative responsibility for their health and healthcare finances. We will be navigating turbulent waters for some time to come. Health system consolidation across the care continuum will likely continue and with it we will see some creative financing and organizational schemes. I think traditional health plans need to worry more about their lack of relationship with their members rather than their public image.

Michael Laskoff1 years ago

Tom Rodgers has never taken the easy way when it comes to healthcare investing. His operational heritage has always caused him to question conventional wisdom and make untraditional choices. And that's what makes him so valuable: he's willing to confront the sacred cows e.g., the McKesson's of the world have no place in the venture space. So to the skeptics out there, I would suggest patience. If Tom believes that McKesson is prepared to make a difference by using its institutional knowledge of the the 'coefficient of friction,' then it's a good bet that we'll see the kind of solid, well-substantiated investing that is good for investors, payors, providers and patients.

C Arm Germany6 months ago

Your blog is very nice and I like it your blog keep sharing with your new article....

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